Please use the provided template to solve the problem and please show work / formula of working cell.

You only need to solve for question 9.6, the picture of question 9.4 is just there for information on how to solve question 9.6.

Please use the provided template to solve the problem and please show work / formula of working cell.

You only need to solve for question 9.6, the picture of question 9.4 is just there for information on how to solve question 9.6.

9-6 ENTERPRISE VALUATION-APV MODEL This problem uses the information from Problem 9-4 about Canton Corporation to estimate the firm's enterprise value using the APV model. a. What is the firm's unlevered cost of equity? (Hint: The firm's debt beta is.20) b. What are the unlevered FCFs for Canton for years 1 through 4? (Hint: The unle- vered FCFs are the same as the firm FCFs.) c. What are the interest tax savings for Canton for years 1 through 4? d. Assuming that the firm's future cash flows from operations (i.e., its FCFs) and its interest tax savings are level perpetuities for year 5 and beyond that equal their year 4 values, what is your estimate of the enterprise value of Canton? e. Based on your estimate of enterprise value, what is the value per share of equity for the firm if the firm has 2 million shares outstanding? Remember that your calcula- tions up to this point have been in thousands of dollars. 9-4 ENTERPRISE VALUATION-TRADITIONAL WACC MODEL Canton Corporation is a privately owned firm that engages in the production and sale of industrial chemicals, primarily in North America. The firm's primary product line consists of organic solvents and intermediates for pharmaceutical, agricultural, and chemical products . Canton's managers have recently been considering the possibility of taking the company public and have asked the firm's investment banker to perform some preliminary analysis of the value of the firm's equity. To support its analysis, the investment banker has prepared pro forma financial statements for each of the next four years under the (simplifying) assumption that firm sales are flat i.e., have a zero rate of growth), the corporate tax rate equals 30%, and capital expenditures are equal to the estimated depreciation expense. Canton Corporation Financials Pro Forma Balance Sheets ($000) 0 1 2 3 4 Current assets $ 15,000 $ 15,000 $15,000 $15,000 $ 15,000 Property, plant, and equipment 40,000 40,000 40,000 40,000 40.000 Total $ 55,000 S $ 55,000 $ 55,000 $ 55,000 $ 55,000 Accruals and payables $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000 Long-term debt 25,000 25,000 25,000 25,000 25,000 Equity 25.000 25,000 25.000 25,000 25,000 Total S 55,000 $ 55,000 $ 55,000 $ 55,000 $ 55,000 0 Pro Forma Income Statements (5000) 1 2 3 4 $ 100,000 $ 100,000 $ 100,000 $ 100,000 (40,000) (40,000) (40,000) (40,000) $ 60,000 $ 60,000 $ 60,000 $ 60,000 (30,000) (30,000) (8,000) Sales Cost of goods sold Gross profit Operating expenses (excluding depreciation) Depreciation expense Operating income earnings before interest and taxes) Less: interest expense Earnings before taxes Less: taxes Net income (30,000) (8,000) $ 22,000 (8,000) (30,000) (8,000) $ 22,000 $ 22,000 $ 22,000 (2.000) (2,000) $ 20,000 $ 20,000 (6,000) (2.000) $ 20,000 (6,000) ( $ 14,000 (2,000) $ 20,000 (6,000) $ 14,000 (6,000) $ 14,000 $ 14,000 In addition to the financial information on Canton, the investment banker has as- sembled the following information concerning current rates of return in the capital market: The current market rate of interest on ten-year Treasury bonds is 7%, and the mar- ket risk premium is estimated to be 5%. Canton's debt currently carries a rate of 8%, and this is the rate the firm would have to pay for any future borrowing as well. Using publicly traded firms as proxies, the estimated equity beta for Canton is 1.60. a. What is Canton's cost of equity capital? What is the after-tax cost of debt for the firm? b. Calculate the equity free cash flows for Canton for each of the next four years. Assuming that equity free cash flows are a level perpetuity for year 5 and beyond, estimate the value of Canton's equity. (Hint: Equity value is equal to the present value of the equity free cash flows discounted at the levered cost of equity.) If the market rate of interest on Canton's debt is equal to the 8% coupon, what is the cur- rent market value of the firm's debt? What is the enterprise value of Canton? (Hint: Enterprise value can be estimated as the sum of the estimated values of the firm's interest-bearing debt plus equity.) c. Using the market values of Canton's debt and equity calculated in Problem 9-5(b), calculate the firm's after-tax weighted average cost of capital. Hint: ) Cost of Tax Debt Value kwacc = 1 - Debt Rate Enterprise Value Cost of Equity Value Levered Equity Enterprise Value d. What are the FCFs for Canton for years 1 through 4? e. Estimate the enterprise value of Canton using the traditional WACC model. Base your estimate on your previous answers, and assume that the FCFs after year 4 are a level perpetuity equal to the year 4 FCF. How does your estimate compare to your earlier estimate using the sum of the values of the firm's debt and equity? f. Based on your estimate of enterprise value, what is the value per share of equity for the firm if the firm has 2 million shares outstanding? Remember that your calculations up to this point have been in thousands of dollars. Problem 9-6: APV Valuation a. Computing Canton's unlevered cost of equity Risk free rate Market risk premium Levered equity beta Debt beta Unlevered beta Unlevered cost of equity 7% 5% 1.60 0.20 #DIV/0! To unlever the equity beta where the level of debt is fixed (as in this case) and debt is assumed to have a beta of zero, we solve the following equation: BE+Bo (1 t) Bu [1+ (1 - 1)] b. Unlevered FCFs for Years 1-4 1 4 N Unlevered FCFs = Firm FCFS (Firm) Free Cash Flow C. Interest Tax Savings = Interest Expense x Tax Rate #DIV/0! d. Estimated APV Present value of Unlevered FCFs Present value of Interest Tax Savings Estimated APV $ e. Estimated per share value APV (firm value) less: Debt Equals: Shareholder value No. of shares (000) Value per share (25,000.00 2.000 $ Sales Cost of goods sold Gross profit Operating expenses (excluding depreciation) Depreciation expense Operating income (Earnings Before Interest and Taxes) Less: Interest expense Earnings before taxes Less: Taxes Net income Pro Forma Income Statements ($000) 2 3 100,000.00 $ 100,000.00 $ 100,000.00 $ 100,000.00 (40,000.00) (40,000.00) (40,000.00) (40,000.00) 60,000.00 $ 60,000.00 $ 60,000.00 $ 60,000.00 (30,000.00) (30,000.00) (30,000.00) (30,000.00) (8,000.00) (8,000.00) (8,000.00) (8,000.00) 22,000.00 $ 22,000.00 $ 22,000.00 $ 22,000.00 (2,000.00) (2,000.00 (2,000.00) (2,000.00 20,000.00 $ 20,000.00 $ 20,000.00 $ 20,000.00 (6,000.00) (6,000.00) (6,000.00) (6,000.00) 14,000.00 $ 14,000.00 $ 14,000.00 $ 14,000.00 $ $ Solution Legend Value given in problem Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input Crystal Ball Output Actual 0 100,000 $ Projected Sales Revenues 2 3 4 100,000 $ 100,000 $ 100,000 $ Sales $ 100,000 $ 100,000 $ Current Assets Property, Plant & Equipment Total Accruals & Payables Long-term debt Equity Total $ $ 0 15,000 $ 40,000 55,000 $ 5,000 $ 25,000 25,000 55,000 $ 1 15,000 $ 40,000 55,000 $ 5,000 $ 25,000 25,000 55,000 $ Proforma Balance Sheets ($000) 2 3 4 15,000 $ 15,000 $ 15,000 $ 40,000 40,000 40,000 55,000 $ 55,000 $ 55,000 $ 5,000 $ 5,000 $ 5,000 $ 25,000 25,000 25,000 25,000 25,000 25,000 55,000 $ 55,000 $ 55,000 $ 5 15,000 40,000 55,000 5,000 25,000 25,000 55,000 $ Invested Capital $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 We use the equity account to make the balance sheet balance. The added equity is raised either through the retention of earnings or sale of new common shares. Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output